Russia has been mired in a recession for the second straight year, kicked off by the initial plunge in crude oil prices during the Summer of 2016. With its economy so closely tied to the export of oil, the ruble (the Russian currency) cratered. Since the middle of 2014, the ruble has lost roughly half of its value.
In many ways, Russia has never fully emerged from the financial crisis from 5 or 6 years ago. Its economy hasn’t recovered even as Western sanctions have eliminated overseas competitors for domestic businesses. Moreover, the Russian financial system has been shaky ever since, and it’s beginning to look more and more like the country’s central bank will have to absorb a slew of smaller Russian banks in order to keep the system afloat.
Russian Banks Stuck in Neutral
After the financial crisis, the Russian central bank had no choice but to once again help prop up the financial sector by distributing 900 billion rubles in bailout funds during the oil crash last year. One of the country’s biggest lenders, Sberbank, burned through 1.3 trillion rubles (roughly $21 billion) in one week to keep itself above water. Although it made it through to the other side, many other Russian banks (mostly smaller institutions) will not be so lucky.
With a stagnation in new loans, Russia’s central bank is bent on culling weaker banks from its system. Over the next several months, the government regulators are expected to shutter or take over even more banks. So far in 2015, Russian banks have been shutting down at a pace of 2 per week. The total number of Russian banks has been cut by nearly 10%.
Meantime, the gears of the financial system in Russia are in desperate need of lubrication. Large firms aren’t taking on new loans as they restructure and pay down debt, but major lenders also aren’t keen on issuing new capital because of the dubious quality (or creditworthiness) of many insolvent corporations asking for them.
All of this is going on in the context of the Federal Reserve keeping the markets’ expectations whipping back and forth about where monetary policy is going. According to experts, the odds of a rate hike began the year around 70%. They gradually sank lower throughout 2015. Now, the same experts are giving about a 70% chance of a December rate hike, bringing the expectation game full circle.
On Wednesday afternoon, the FOMC (Federal Reserve Open Market Committee) will be releasing the meeting minutes from its October gathering.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.